Nornickel President Vladimir Potanin: Only unconventional move will help address our problems
Vladimir Potanin
Press-office
Nornickel has faced certain difficulties in implementing its Sulphur Program, losing access to Western equipment and technology in the wake of the deteriorated geopolitical situation in spring 2022. At the same time, sales of goods became sharply more difficult, as a number of traditional customers from Europe and the United States refuse to buy Russian metal or demand discounts. Nornickel may count on only 80% of its revenue at some points in early 2022 due to "self-sanctions" and payment problems. Finding itself in the position of a "perfect storm," the company decided to take advantage of the international division of labor: to move some of its outdated production chains to China, its largest consumer market, and gain access to battery technology for future ramping up of its domestic production process.
Nornickel President Vladimir Potanin told Interfax in an interview about how this move addresses the environmental situation and disruptions in metal sales, and will contribute to the future growth of production and Norilsk's development.
Q.: How is the situation around the Sulphur Program unfolding after Prime Minister Mikhail Mishustin tasked the company with fast tracking the retrofit of the Copper Smelter?
A.: In October 2023, we launched the Sulphur Program at the Nadezhda Plant, its first line, which is currently gradually reaching its full capacity. The launch process was more painful than it could have been expected due to the decline of many Western partners to meet their commitments. However, the project is being successfully implemented, we have achieved the technical specifications that we had planned, which is more than 99% sulphur capture. It means that the technology is physically working on a huge industrial scale. And the operability of the technology was the main risk, since this project is groundbreaking.
We will thus fulfill Norilsk Nickel's environmental obligations to the state in accordance with the plan we signed. Once we reach the design targets, emissions in Norilsk will be reduced by 45%, which means capturing almost one million tonnes of sulphur dioxide. For this purpose, we will be launching the second and third lines at the Nadezhda Plant at the end of the third quarter.
At the same time, we have to realize that we have resolved environmental problems through setting up a rather large production facility, which is utterly unprofitable. As a result of sulphur capture, the production of sulfuric acid and its subsequent neutralization, we produce many millions of tonnes of gypsum, which we store in a gypsum storage facility. It is an environmentally friendly waste product, but we actually spend a lot of money to bury huge amounts of gypsum in the ground. It is a little frustrating to me as a businessman when we have to take steps that are not entirely rational and that incur losses. This leads us to believe that further fulfillment of our environmental commitments needs to be improved. Moreover, following Mikhail Vladimirovich Mishustin's instruction, we have used all of our intellectual capabilities to review the Copper Smelter's program to the maximum extent possible. The fact is that the Copper Smelter is even more important for Norilsk residents in terms of emissions than the Nadezhda Plant because it is closer to the city, and we have long been forced to halt production from time to time to reduce emissions. However, we are facing a very strong headwind in addressing this challenge. We no longer have access to Western technology, equipment, and software. We have reprogrammed many things, having involved domestic suppliers; nevertheless, it is impossible to avoid dependence on imports for this project completely. Additionally, the project would have doubled the amount of gypsum produced at the Copper Smelter.
As this is always the case in such matters, only an unconventional move will help address the problem. The negative impact of sanctions imposed on the Russian non-ferrous metallurgy contributed to this solution. These sanctions have now been formalized, but even prior to that we, like other producers of Russian raw materials and other goods, encountered customer denials and the need to provide discounts. This pressure forced us to think about how to bring our goods to the sales markets in the right way. And one of such non-standard solutions is to transfer a part of production to the markets of direct consumption. This is how the idea of setting up smelting facilities for copper concentrate in China was brought about. This will allow us to bring the product closer to the place of consumption, and then the final product will be sold as a Chinese one. And Chinese goods are much more difficult to authorize in China than Russian goods coming into China.
This largely addresses the matters of mutual settlements. Settlements are now one of the most bottlenecks even in friendly jurisdictions, preventing exporters and importers from carrying out their activities in a normal way. Financial restrictions are now making access to credit resources and debt servicing more expensive: Norilsk Nickel will shortly spend three- to fourfold more on servicing than it did three to four years ago. The cost of transactions, various commissions, and the cost of intermediaries' services have already reached several percentage points, sometimes up to 5%-7%. It was hard to imagine that such a thing was even possible a few years ago. But in the domain of settlements, the risks are especially acute, because the lack of settlements could block the operations of enterprises. Of course, we have to avoid these risks as much as possible. And the existence of certain production chains that bring our goods directly to the consumer market deals with this problem, as well.
Q.: Does it turn out that the problem with implementing the Sulphur Program at the Copper Smelter prompted Nornickel to rethink its strategy?
A.: I would say that we have been rethinking it over the past four years, influenced by the experience of the pandemic, sanctions and many other things.
It is a new idea of how the international division of labor should work. We agree with friendly jurisdictions to focus on areas where everyone is effective, while maintaining the entire chain of competencies. A win-win situation arises. Norilsk Nickel will focus on those competencies, which are most profitable for us and in which we are most successful, it is mining and processing, and will have the battery production chain. We are shifting our environmental problems, issues of settlements, problems of market access, and problems of customizing our goods for the consumer market to the location where they are resolved most efficiently, in this case, to China. China accounts for 50% of nickel and copper consumption, and now, taking into account the refusal of Europe and America from our goods, China will account for more than half of our sales.
By moving our smelting production facilities closer to our sales markets, we have an opportunity to master technologies for producing battery materials. With these technologies in place, we will be working with Rosatom to manufacture both cathode materials and batteries, using products from the Kolmozerskoye lithium deposit. Battery production is a major story both for transportation and for various industrial facilities. In other words, we are moving economically inefficient and environmentally harmful sulphur production to China, and in return we get an opportunity to extend our value chain and gain advanced competencies that both the company and the country need.
Furthermore, we are relocating the center for addressing the environmental problem to China, where there are more technologically advanced scenarios for doing so. The by-product of production can be sulfuric acid, which is in demand on the Chinese market, and we will be able to sell it there. Apart from economic considerations, this scheme is also feasible from an environmental point of view: we will not bury anything in our tundra, and our descendants will not have to dig it up a hundred years from now.
And another interesting factor is that we adapt our goods to the requirements set by the consumer. For many years, we have assumed that Norilsk Nickel is a mining company. The final stage is to supply raw materials. Although metallurgical conversion is a rather sophisticated technological process, it is still far from hi tech. No one expected us to go into other, more advanced stages of value chain creation, in particular, into battery materials, alloys, and into the production of batteries themselves. And now the time has come to realize that we have to advance along these chains. There are several reasons for this. First, the sanctions have pushed us towards this. The requirements of technological and financial sovereignty dictate that we should have competence in the production of sensitive elements in the value chain. Of course, no one has abolished the international division of labor. But as part of this division of labor, you need to excel in what you are better at doing and attract a strong partner where you are not competitive, retaining your core competencies.
Q.: Will the construction of capacity in China be synchronized with the shutdown of the Copper Plant's smelting capacity, and will copper output not drop off? How will copper concentrate be delivered to China?
A.: Of course, the construction of capacity in China is synchronized with the decommissioning of capacity at the Copper Smelter. This will happen beyond the horizon of 2027, by which time we will have delivered our Chinese project. Therefore, in terms of production plans and volumes, the process will be neutral. In the future, we expect an overall increase in production due to the effect of increased mining and processing.
We are planning to supply about two million tonnes of copper concentrate per year via the Northern Sea Route. We are setting up additional logistics capacity, preparing to expand the terminals in Dudinka and Murmansk so that they can handle large volumes. Our main flows are oriented towards the western corridor until 2030, as we are shipping our produce from Murmansk across transshipment points to Tangier, from where it goes to China. We are currently using the eastern corridor in summer, when it is ice-free. However, closer to 2030, the eastern corridor is expected to be expanded, and then we will secure its additional filling, which will bring extra savings for us. For this purpose, we are drafting an agreement on icebreaker escort with Rosatom, and we are going to replenish our own fleet.
Q.: What will the production scheme in the Norilsk Industrial District look like after the Copper Plant's smelting capacity has been moved to China?
A.: By addressing environmental issues while solving the problems of sales and settlements, we will be able to improve a huge number of indicators. We will remove an obstacle to further development of the whole of Talnakh and the Norilsk Industrial District, which will allow us to grow vigorously in terms of both mining and processing by 2030. That is why we are now accelerating the construction of the third stage of the Talnakh Concentrator, which will be needed in the production growth chain. Ideally, once the project to establish smelting facilities in China is implemented, we will have the most advanced smelting facility at the Nadezhda Metallurgical Plant. It can be expanded as we still have room for the third stage, which we will need by 2030, when we will need to ramp up production. Increased production means higher tax base both for the Krasnoyarsk Territory and for the country as a whole.
We expect that by mid-2027 we will be able to build a plant in China, having prepared our logistics and everything we need to supply concentrate. And we have to resolve our environmental issues by the same deadline.
Q.: How will the employment issue be dealt with following the shutdown of the Copper Plant's smelting facilities and could a new production facility appear on its site?
A.: The Copper Smelter employs around 2,000 people. Everyone who wants to continue working for the company will be employed. We expect that they will fit into the overall demand of the Norilsk Industrial District, where unemployment is practically nonexistent and stands at 0.2%. We hire around 4,000 people a year in Norilsk. By systematically replacing outdated conversion processes and approaches with new, more economically viable ones, we are creating jobs in logistics, programming, and 3D printing.
We will deploy state-of-the-art production at the Copper Smelter site: from modern transshipment points, concentrate drying, preparation and storage facilities, to high-tech 3D printing of various parts for equipment required for the Norilsk Industrial District. We have already started doing this at the Norilsk Division, and we will replicate it on the premises of the Copper Smelter. This will have an important aesthetic value, as the old workshops of the Copper Smelter will be replaced by modern buildings where people in white robes will be employed in high-tech production.
This means that we are not talking about the shutdown of one specific enterprise, but about a change in approaches to economic management, to partnership, to the international division of labor, to creating value chains on a completely different basis. And, as a consequence, this will require completely different personnel. There will be additional demand for IT specialists and engineers. We will both train them ourselves at the Polar State University and use the capabilities of the Siberian Federal University in Krasnoyarsk to this end. This will have a certain synergy with our intention to be an anchor resident in the technology park in Krasnoyarsk.
The cutting-edge production facility will provide various parts and units not only for Norilsk, but also for other companies operating in Taimyr. Now oil and gas producers are actively exploring this region. As you know, we have established a minor joint venture with Lukoil. The joint venture will develop. Perhaps, 3D printing will be useful for this kind of enterprise. I think that this process will make an important contribution to import substitution and will make it possible to develop essential functions and competences in our country.
Q.: Tell us about the contours of the Chinese joint venture. What economic effect do you expect?
A.: We are setting up a joint venture with international partners. This means that we will receive a share in the revenue of international projects and return a significant part of them in the form of dividends to Russia for domestic investment.
The project will allow us to avoid large losses, which are caused by the current difficulties with settlements, refusing supplies, discounts for our metal, and building up inventories. According to our estimates, this puts 15% to 20% of our revenue at constant risk, and some of these risks have already come to fruition. This means that if we take our revenue before 2022 as 100%, adjusted for prices, then now we can confidently count on only 80% of it. And even 80% is not a guaranteed lower boundary.
As soon as we implement our international projects, we actually lose all this discount. Even a surplus is formed. There are three explanations for this: the removal of discounts and other losses, profits from the share in the joint venture, and higher production volumes due to the expansion of the bottleneck. According to our estimates, which we submitted to the government, the Finance Ministry and the Trade and Industry Ministry, Nornickel will be able to raise its revenue 20% compared to the situation before the beginning of 2022 after this project is implemented. For the purposes of the budget, we will reach indicators within four years that are nearly 1.5-fold better than what we have now, and 20% better than two to four years ago.
Q.: Has the project been agreed upon at the political level?
A.: We have reported this project at all levels, including the president and the prime minister, and we are collaborating with the relevant ministries. Given all of its advantages, we believe that the project has every chance to be backed documentarily. As far as I know, it is already on the agenda of Russian-Chinese summit meetings, which means that it has gained political support. The specifics of the Chinese market are such that it is better to work there with political support at the top level. Having secured this support, we will specify our plans quite swiftly. At the same time, we are already designing those capacities that we will have to build. This will allow us to synchronize the project commissioning with the timeframe in which we will need to shut down capacity at the Copper Smelter in order to meet our obligations to the government to reduce emissions.
Q.: Has a Chinese partner been chosen?
A.: I will allow myself to limit myself only to general stories about what this project is all about. First, it is not yet sufficiently finalized. Secondly, it is not safe to give details in the current situation. At least, until the process is irreversible and we have specific results.
The sanctions imposed on Atomyze, a tokenization platform in which we invested, give a vivid example of how our plans are undermined as they arise. As soon as it became known on the market that digital financial assets were being seen as one of the alternative ways of organizing settlements, including cross-border ones, a preventive sanction blow was immediately dealt to them.
Q.: Will cooperation with China be limited to the copper chain or is cooperation in nickel, one of the main components for creating batteries, possible?
A.: We are also improving the nickel chain and we will be advancing with cobalt and lithium. We are going to join in joint ventures with Chinese producers of both lithium-based and sodium-ion-based battery materials in order to be represented in all major technologies to the fullest extent possible. At the same time, our Gipronickel Institute is exploring our own capabilities to produce battery materials.
We will have one partner for copper projects, and others for nickel and lithium materials. Hence, we will have diversification, and we will have different conditions with all partners, but we proceed from the fact that we are entering international markets seriously and for a long time. We believe in strategic terms that such partnerships have an important synergy, as we gain access to advanced technologies in industries essential for Russia, while our partners get the opportunity to procure raw materials for their production facilities in the long term.
This, according to our plan, should also help us to sell our goods. Now there is a problem of voluntarily rejecting Russian goods. All of this looks very strange, but it works against us, complicates our sales process and the receipt of payments. We have learned to cope with it, but it persists and will have a severe impact in the future.
We can tackle it by supplying our metals such as nickel, cobalt and others in the form of finished products, in the form of batteries, or at least in the form of materials for their production. This is how we will be able to relieve our distribution system and facilitate access to those markets that have temporarily, hopefully, closed for us. We will infiltrate those markets that we are accustomed to, but in a form that is unfamiliar to us. Instead of circumventing sanctions and using schemes that are not entirely transparent, we will package our goods in a more advanced shell. And there is no escape from it. I hope that we will have a good practice for this within the next three to four years, and we will not have those problems that we had in 2023 and have now.
Q.: BASF was previously the company's partner in the battery chain, and there were plans to build a plant in Finland. What about this project? Will the shutdown of the metallurgical plant and the transfer of capacity to China affect the prospects and objectives of NN Harjavalta?
A.: Harjavalta's crucial role is to supply Europe and partially America with products that are in demand there. This is a window for us to Europe, to the Western world. Although I do not really understand how it will work now due to the recent sanctions imposed on Russian metals. The future of this enterprise largely depends on the development of the geopolitical situation.
We had an agreement with BASF to build a door-to-door plant near Harjavalta. The parties would achieve huge savings there, because two technological conversions would be evaded owing to this. It is hard to imagine a more promising system for supplying raw materials for battery materials. The economic effect was expected to be very good, but then two unpleasant events occurred in succession, which I cannot evaluate. First, the Finnish authorities did not give BASF permission to operate the already built plant, although the Finnish region was extremely interested in it, and all of the requirements were, as it seemed to us, met. And then the sanctions phase began, and this project, which looked very promising, was put on hold. But I am still hopeful that its economic potential is so high that it may be fully implemented one day sooner or later. Perhaps, this time will not come, or other shareholders are needed for this.
Q.: Is it possible to ship raw materials to the new facility in China from the Bystrinsky Mining and Processing Plant?
A.: The copper concentrate is quite specific in terms of sulphur content and other elements in Norilsk. Any production facility that we will build in China must be technologically adaptable to the quality of ore that we produce in Norilsk. Besides, such a scheme is inconvenient in terms of geography and logistics. Bystrinsky concentrates are delivered to the northern border regions in China, while the logistics for copper concentrate from Norilsk is likely to be linked to the southeastern and eastern Chinese ports, and therefore the synergy is not obvious.
The synergy is more likely to be possible with other Russian copper projects that are more inclined towards the Chinese market and the Far East. We also have other copper smelters in the country that supply or are going to supply copper concentrate to China. We will probably reach certain agreements with our industry partners here, as well. We will probably discuss this with them at a later stage.
We have excessive copper capacity in our country, so the question arises as to whether it is more profitable to build additional smelting facilities, smelt at home and then export copper, or export concentrate and smelt copper abroad. My preliminary opinion is that the second option is better. Because smelting is the most capital-intensive and vulnerable, and the least profitable process, and if it has no continuation, then maybe it makes sense to relocate it. The more so as we have smelting competences in our country, and we will have enough copper and nickel for domestic consumption.
Q.: China, relying on Indonesian raw materials and plants built in that country, is playing an increasingly important role on the nickel market, which has an adverse effect on the price. Doesn't Nornickel fear a similar situation with copper, and won't the company become a hostage of China's pricing, or will nothing much change here due to greater diversification of production?
A.: In any case, the dependence of Russian producers of copper, nickel and a number of other metals on China is very high. China has a tremendous share both in the global consumption of these metals which is over 50% and in the supplies of our companies, in particular, Norilsk Nickel. This dependence is increasing with the growing sanctions pressure. We will not escape from it anyway, but being integrated to a greater extent into the Chinese economy, we are more protected than if we do not have it. We are certainly dependent on the Chinese system, but it is better to be inside that system rather than outside watching you being squeezed out, so to speak. If this cannot be avoided anyway, if we cannot diversify our supplies in such a way that we do not depend on the Chinese market, then it is better to go deeper into it and integrate.
It seems to me that being involved in the Chinese market and having investment, enterprises, interconnections, and partners there, taking into account the political agreement on projects, gives us certain levers to manage the situation. It does not give us a hundred percent guarantee that we will never encounter problems there. But it is better to be actively involved and to have at least certain tools in this dialogue than to be just a market trader from whom parties may refuse to buy goods or give a discount for them.
It is fair to say that China is the dominant, but not the only actor on this market. Of course, copper supplies are more diversified, so there is no definite dominant influence there. It is limited by both supply and demand. Roughly speaking, the Chinese cannot engage in voluntarism either.
This, by the way, is illustrated by the example of nickel. No matter how they adjust relations with Indonesia and the Philippines, the nickel price is still following the global supply and demand. The ratio of supply and demand will still set a positive trend in prices, and vice versa, the lack of demand will bring about a negative trend. China cannot reverse this trend, as it is simply in a position where it can take better advantage of it. Naturally, at the expense of those who supply raw materials, that is, at our expense. And that is why it is better to be together with them at this moment and better understand what they are doing and influence it than to watch this process from the outside.